California ruling may affect ISP fees

State regulators are set to consider a controversial issue that pits local phone companies against Internet service providers, with consumers possibly stuck in the middle.

3 January 200211:43 am AEDT

California state regulators are set to consider a controversial issue that pits local phone companies against Internet service providers, with consumers possibly stuck in the middle.

The California Public Utilities Commission (CPUC), the state's telecommunications regulatory body, is scheduled to vote this week on two items which will decide whether local phone calls to ISPs should be treated and charged as local calls, or as essentially long distance calls due to the global nature of the Internet.

ISPs say an unfavorable outcome could dramatically raise the price of Internet access in California, possibly hurting the development and expansion of the Net. But local phone company executives say calls to ISPs are taxing their networks and unfairly costing them millions of dollars to carry.

The commission will consider arbitration between Pacific Bell and Pac-West Telecomm, an alternative local phone service provider, that should clear the way for a new contract between the two companies. By approving the item, the commission would effectively rule that local calls are indeed local calls, reaffirming an earlier decision by the panel. It would be seen as win for Pac-West and for many ISPs, as well as for consumers.

But Pacific Bell also has petitioned the commission to reconsider its earlier ruling, handed down last October. If the CPUC votes in favor of Pacific Bell's proposal, the commission will reconvene at a later date, allowing Pacific Bell and other local phone companies in the state to claim at least an initial victory.

"We think the more thorough the review the more the record will show that these are interstate calls," said Bill Mashek, a spokesman for Pacific Bell.

Reciprocal compensation
At issue is a complex series of technical agreements and contracts between local phone companies, such as Pacific Bell, and competitors, such as Pac-West Telecomm.

Phone companies pay each other a per-minute fee for using competitors' networks to complete a call. The process is known as "reciprocal compensation," but it only applies to local phone calls; fees attached to interstate long distance calls are known as "access charges." Access charges do not apply, however, to so-called enhanced services such as Internet traffic.

The reciprocal compensation fees for local calls are intended to help offset the cost of maintaining phone networks and gives local phone companies an incentive to carry calls that originate from a customer of a competitor.

For instance, if a residential phone customer of Pacific Bell were to call a local area business served by Pac-West, then Pac-West would collect a fee from Pacific Bell.

After passage of the Telecommunications Act of 1996, the local phone companies pushed for reciprocal compensation. Because the large local phone companies serve the majority of customers in any one area, the Baby Bells thought the new fees would mean tons of money for them, critics say.

But, many ISPs use smaller, competitive local phone companies for phone service--as services are often cheaper or more flexible--rather than the larger Baby Bells.

As a result, when an Internet user--likely a Baby Bell customer--calls their ISP, the competitive local phone company serving that ISP gets the fee. Dial-up modem users typically are online for long periods and tie up phone circuits for hours at a time, running up large reciprocal compensation bills for the Bell companies.

At the same time, most local phone calls only last a few minutes. So, although the large local phone companies have many more customers than their smaller competitors, they have had to make huge reciprocal compensation payments to those competitors.

"What they thought was going to be a windfall was not, and suddenly they realized it was a mistake. Now they want to get out of it," said Les Kumagai, a spokesman for MCI WorldCom, an alternative local provider in some areas.

The FCC chimes in
The Federal Communications Commission, however, ruled in February that local calls to ISPs should be treated as interstate calls. The commission decided that, although the actual call to the ISP is a local one, the Internet is global and the Net user is technically accessing information and communicating with people worldwide.

"Calls to the Internet are jurisdictionally interstate and since they are interstate, reciprocal compensation should not apply," Mashek said.

But, the FCC also said that existing interconnection contracts between the Baby Bells and their smaller competitors must be honored, leaving the local phone companies on the hook for millions of dollars in fees.

Some industry observers have said the FCC has only confused the issue.

The Baby Bells have claimed victory over the FCC's decision, while rival phone companies say if existing contracts must be honored, their side has prevailed.

The controversy has been taken up in one form or another in more than a dozen states since the FCC made its ruling in February. In all but a few cases, state regulators have ruled against the Baby Bells, saying that calls to ISPs were essentially local calls.

The California Public Utilities Commission will consider the issue Thursday.